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Briefing Note - Consumer Insurance (Disclosure and Representations) Bill

18 May 2011

On 17th May 2011 the Government introduced the above Bill to overhaul consumer insurance law.  The intent is to give certainty to consumers and insurers by shifting the emphasis away from a consumer’s duty to disclose all necessary information, to a requirement for insurers to ask particular questions and obtain specific information about their customers, before they issue an insurance policy.

The view expressed by the Government is that the current law has changed little for over 100 years, since the Marine Insurance Act 1906 (which codifed the law in relation to all forms of insurance), and the additional layers of regulation, via the FSA and the Financial Ombudsman, have become complex and confusing for consumers, and expensive for the insurance industry to administer.  The hope is that the Bill will provide better protection for consumers and reduce the cost to industry. 

The key provisions of the Bill are as follows:

Clause 1 states that it relates to consumer insurance contracts.

• These are contracts between individuals who are contracting wholly or mainly for purposes unrelated to their trade, business or profession, and those carrying out the business of insurance.

Clause 2 imposes a duty on the consumer to take reasonable care not to make a misrepresentation to the insurer. 

• This includes a failure to respond to a request for information.  The rule in the Marine Insurance Act 1906 that if the insured does not disclose every matter that would be material to the insurer’s decision to insure, the contract can be avoided even when the insured is not aware of what the insurer would consider material, is abolished for consumer purposes. 

Under Clause 3, the question of whether or not the consumer has taken reasonable care not to make a misrepresentation is to be determined in the light of all the relevant circumstances. 

• Examples are given of what may need to be taken into account.  These include the type of consumer insurance in question, the target market, any relevant explanatory material or publicity produced or authorised by the insurer, and how clear and specific the insurer’s questions in the pre-contract negotiations were, and whether the consumer was using an agent. 
• The standard of care is of a reasonable consumer, but if the insurer was or should have been aware of any particular characteristics or circumstances of the actual consumer, these are to be taken into account.  However a dishonest representation is always to be taken to show lack of reasonable care by the consumer. 

Under Clause 4, in order to have a remedy against a consumer for a pre-inception misrepresentation, the consumer must have failed in his or her duty of reasonable care, and the insurer must show that without the misrepresentation, the insurer would not have entered into the contract at all, or would have only have done so on different terms. 

• This preserves the traditional rule in Pan Atlantic v Pine Top.  The misrepresentation may be either deliberate or reckless, or careless, and the burden of proof is on the insurer to show that a misrepresentation was deliberate or reckless, although there is a presumption that the consumer had the knowledge of a reasonable consumer, and knows that if a clear and specific question is asked by the insurer, it is relevant. 

The remedies available to the insurer if misrepresentation has occurred are set out in Schedule 1 to the Bill. 

• If the misrepresentation was deliberate or reckless, the insurer may avoid the contract and need not return any of the premiums unless it would be unfair to retain them. 
• If the misrepresentation is careless only, the insurer’s remedies are based on what it would have done if the consumer had made disclosure in accordance with his or her duty of care.  The possibilities envisaged are as follows:
• • If the insurer would not have entered into the contract on any terms, the insurer may avoid the contract and refuse all claims, but must return the premiums.
  • If the insurer would have entered into the contract on different terms, other than in relation to the premium, the contract should be treated as if those different terms apply, if the insurer so requires. 
  • If the insurer would have entered into the contract, either on same or different terms, but would have charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim.  Thus, if an insurer charged £1,000 for the premium but would have charged £1,500 if the true facts had been disclosed, and the consumer’s claim was for £30,000, the consumer would receive two thirds of the claim, i.e. £20,000. 

Under Clause 6, provisions which seek generically to turn representations into warranties forming the basis of the contract are outlawed. It will remain possible for insurers to include specific warranties in the insurance contract, but they will need to be fair within the meaning of the Unfair Terms in Consumer Contracts Regulations 1999.   

Under Clause 7, the provisions of the Bill apply to group insurance in relation to individuals, but do not affect the contract as a whole.  Under Clause 10, contract terms which would have the effect of contracting out of the legislation are unlawful.  However it is sensibly provided that an agreement which settles a claim does not fall within the prohibition of contracting out rules, in relation to putting the consumer in a worse position.  Otherwise, it could be argued that it would be impossible to agree to settle a claim for less than the insured considered it was worth.

Schedule 2 of the Bill contains rules for determining the status of agents.  Unless the agent is doing something as the appointed representative of the insurer for the purposes of the Financial Services & Markets Act 2000, or is collecting information with the express authority of the insurer, the presumption is that the agent is acting as the consumer’s agent unless it appears otherwise from the circumstances. 

Comments

The Bill abolishes the consumer’s duty to volunteer all material information to the insurer, and replaces it with a duty to take reasonable care not to make a misrepresentation during pre-contract negotiations. 

If the consumer breaches this duty and the misrepresentation induces the insurer to enter the contract, the nature of the insurer’s remedy depends on the nature of the consumer’s misrepresentation.  If the consumer makes a deliberate or reckless misrepresentation, the Bill permits the insurer to treat the contract as if it never existed and refuse all claims.  If the consumer answers questions posed by an insurer on a careless basis, the insurer’s remedy depends on whether it would have entered into the contract at all, or on different terms. 

Renewals are covered by the duty, and the duty of utmost good faith post inception on the part of the insured is unaffected. 

A potential trap for the insurer is that it is deemed to take into account any particular characteristics of the actual consumer, such as their age, mental condition or knowledge of English that has come to its attention. This will affect the duty of the insured, and the question of whether avoidance is reasonable in the circumstances of the case.

The Bill also seeks to change the law in that under the Marine Insurance Act 1906, a misrepresentation provides the insurer with a remedy if it would have influenced the judgment of a hypothetical prudent underwriter.  This test is not preserved by the Bill, which stipulates that it must be shown that the actual insurer who is party to the contract, rather than any hypothetical insurer, would have relied upon the misrepresentation.  This may give rise to difficulties of proof, and potential enquiry into the underwriting standards of the insurer. 

Summary

The Bill appears to have all-party support and is intended to reflect the Law Commission Report which was published on the subject a few years ago.  Some of the principles are adopted by industry convention or under the FSA rules and “Treating Customers Fairly” principles already.  There will however be questions of proof on both sides which are likely to give rise to the inevitable risk of arguments in the future. 

For further information please contact Adrian Bingham.